Econ 102 Section 4 – Principles of Macroeconomics
Instructor: C. Burkart
Once again, you will receive 5 points for putting your exam version in the correct folder when you are done. Your exam version is at the top right hand side of this page. If you put your exam in the wrong folder, grading of it may also be delayed. Multiple-choice questions are worth 3 points each.
1. An individual's demand for money
a. is unaffected by that individual's wealth.
b. refers to the amount of wealth the individual chooses to hold as money instead of other assets.
c. is unaffected by the interest rate.
d. (a), (b), and (c).
2. Which of the following factors does not influence the amount of money an individual demands?
a. The price level.
b. The money supply.
c. Real income.
d. The interest rate.
3. The interest rate is initially at 4% in the money market. Suppose the interest rate rises to 6%. This will cause
a. the money supply curve to shift rightward, resulting in an increase in the equilibrium quantity of money.
b. the money supply curve to shift leftward, resulting in a decrease in the equilibrium quantity of money.
c. the money demand curve to shift leftward, resulting in a decrease in the equilibrium quantity of money.
d. the money demand curve to shift rightward, resulting in an increase in the equilibrium quantity of money.
e. a movement along the money demand curve.
4. If the price level increases, this will shift the
a. money supply curve rightward.
b. money demand curve rightward.
c. money supply curve leftward.
d. money demand curve leftward.
5. Suppose the Fed makes an open market purchase of bonds. This will
a. increase the money supply, resulting in an increase in the interest rate.
b. increase the money supply, resulting in a decrease in the interest rate.
c. decrease the money supply, resulting in an increase in the interest rate.
d. decrease the money supply, resulting in a decrease in the interest rate.
6. Equilibrium in the money market
a. occurs when the quantity of money demanded equals the quantity of money supplied.
b. implies equilibrium in the bond market as well.
c. implies that people are satisfied with their allocation of wealth between money and bonds.
d. (a) and (b) only.
e. (a), (b), and (c).
7. When there is excess demand for bonds
a. there is also excess demand for money.
b. the price of bonds will fall and the interest rate will increase.
c. the price of bonds will increase and the interest rate will decrease.
d. the money market is in equilibrium.
e. the interest rate is too low.
8. Why is the demand for money not infinite if individuals would prefer more and more goods and services?
a. Because the supply of money is not infinite.
b. Because the demand for money measures the amount of money people would like to hold, given constraints.
c. Because people do not always prefer to have more goods and services.
d. Because the demand for money is positively related to the interest rate.
9. The wealth constraint states that
a. As money demand increases, wealth increases.
b. As wealth increases, the quantity of money demanded increases.
c. At any given time, wealth is fixed.
d. As wealth increases, money demand increases.
10. In 1973, the OPEC cartel raised world oil prices dramatically. In the U.S., this shock must have caused a shift in the __________ curve, a(n) ______________ in the price level, and a(n) ______________ in the equilibrium total output.
a. AD; increase; decrease.
b. AD; decrease; increase.
c. AS; increase; decrease.
d. AS; decrease; increase.
11. Which of the following would be most effective in reversing stagflation?
a. An increase in government spending.
b. An increase in investment.
c. An improvement in technology.
d. Both (a) and (c).
12. An increase in the money supply will cause the AD curve to:
a. shift leftward.
b. shift rightward.
c. stay the same.
d. shift leftward, but without affecting the price level.
13. Which of the following is not a determinant of the location of the AD curve?
a. Government purchases.
b. Autonomous consumption spending.
c. Interest rates.
d. Productivity.
14. Complete the following explanation of why the AD curve slopes down. If the price level decreases, then money demand ____. For a given money supply this will cause the interest rate to ___. This will lead to a(n) ___ in consumption and investment spending and there will be a(n) ____ in output.
a. increases; increase; decrease; decrease.
b. increases; decrease; decrease; increase.
c. decreases; increase; increase; decrease.
d. decreases; decrease; increase; increase.
15. Which of the following best describes the aggregate demand curve?
a. A graph that tells us the equilibrium GDP at any price level.
b. A graph that shows total spending for the economy at any price level.
c. A graph that shows total demand for the economy at any price level.
d. A graph that shows the total quantity of output that purchasers want to buy at any price level.
16. Each point on the AD curve represents
a. the total spending in the economy.
b. the total demand for goods in the economy.
c. a short-run equilibrium.
d. a long-run equilibrium.
17. When constructing the AD curve, which of the following best describes what happens when the price level falls?
a. As the price level falls there is a decrease in money demand, a decrease in the interest rate, and an increase in expenditures and equilibrium GDP.
b. As the price level falls there is an increase in money demand, a decrease in the interest rate, and an increase in expenditures and equilibrium GDP.
c. As the price level falls there is a decrease in money demand, an increase in the interest rate, and an increase in expenditures and equilibrium GDP.
d. As the price level falls there is a decrease in money demand, a decrease in the interest rate, and a decrease in expenditures and equilibrium GDP.
Question 18 [12 pts.] Use an AS and AD graph to illustrate the
short-run and long-run effect on real GDP and the price level of an
increase in autonomous consumption spending. Assume the economy
begins at full employment. Be sure to label clearly and indicate
clearly what is happening for full credit. Add a brief text
explanation if you think anything in your graph is unclear.
Question 19 [12 pts.] Suppose that, in an attempt to keep the economy from overheating, the Fed raises the interest rate via an open market operation. Illustrate graphically the effect on:
a. Money Supply
b. The interest rate
c. Equilibrium GDP
(To do this you need to show two graphs, one of the money market, one of the short-run equilibrium. Unlabeled axes have been provided for you, make sure to label those and clearly indicate what is happening). Add a brief text explanation if you think anything in your graphs is unclear.
